B.3 One-time Changes

Question 1

Why adjust for one-time changes in ratemaking?

Answer 1

So that the data is most representative of the future policy period being priced. Not making these adjustments might lead to excessive or inadequate rates.

Question 2

Types of effects for one-time changes

Answer 2

Direct effects are the direct and obvious impacts to
premiums, losses, or expenses resulting from the change, all else being equal.

Indirect effects are the impacts to premiums, losses, or expenses from changes in human behavior that are
consequences of the one-time change.

Question 3

Why direct effects of coverage increases on losses are

difficult to quantify

Answer 3

Historical losses may have been capped at lower levels of coverage, or a coverage may not have existed historically.

Question 4

3 ways to calculate the direct effect of a coverage

change on losses

Answer 4

1. Restate individual claims at new coverage levels: This is
   the preferred method, but it requires historical individual
   claim data.
2. Calculate the effect on representative groups of claims:
   Use a weighted average of the impact of the change on
   different segments.
3. Simulate losses under new coverage levels: A simulation can be run to try and quantify losses under the new coverage levels, though the parameters of the simulation may be difficult to choose.

Question 5

2 methods to on-level premiums

Answer 5

1. Extension of Exposures: This method re-rates all historical policies at the individual policy level using the newest rates, and then re-calculates the earned premiums for each historical period using the newest rates.
2. Parallelogram method: This method is used on grouped policy data, and adjusts the historical premium by an average factor for each historical period.

Question 6

Advantages and disadvantages of Extension of

Exposures method

Answer 6

The advantage is that it is the most accurate method. The challenges include getting the detailed data, the computing power this may require, the need to make assumptions for new rating variables with no historical data, and it may be difficult to incorporate changes in schedule rating guidelines for commercial lines of business.

Question 7

Advantages and disadvantages of Parallelogram

method

Answer 7

The advantage is that it is quicker to calculate. The
disadvantages are that it assumes policies are written evenly throughout the historical period, and that aggregate on-level factors produced by this method may not be appropriate for class level ratemaking.

Question 8

Ways to correct for uneven writings with

parallelogram method

Answer 8

Use shorter time periods (e.g., quarters instead of years) to reduce the inaccuracy.

A more accurate way is to aggregate historical data by rate level.

Question 9

Parallelogram method assumption for Losses

Answer 9

That losses are uniformly distributed over the historical

period being used.

Question 10

Two ways that a benefit change can apply to losses

Answer 10

1. To all losses on policies written after a certain date.
   This is analogous to the slanted rate change lines in the
   parallelogram method.
2. To all new losses occurring after a certain date. This
   is analogous to the vertical law change lines in the
   parallelogram method.